COLLECTED WISDOM™ on 401k Hardship Withdrawals
This archive contains not only the most current material on the topic, but also older items that are still relevant, provide background, perspective or are germane to the topic.
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Hardship distributions are a valuable component of many 401k retirement plans. They encourage participation in the plan and provide a sense of security to participants as they seek a balance between retirement savings and current financial needs. But plan sponsors need to know the rules and administer hardship withdrawals carefully.
Abstract: A good basic overview on the issue and rules.
Abstract: Occasionally an employee may experience a serious financial need. With no other help available, raiding a retirement plan may be the only option. Prior to 2019, employees and employers alike may have faced hurdles when wrestling with a hardship distribution. Due to new laws, however, hardship distribution rules are changing in 2019.
Source: Hallbenefitslaw.com, February 2019
Abstract: A 401k plan may allow employees to receive a hardship distribution because of an immediate and heavy financial need. But often hardship distributions are not made properly. This document reviews how to fix the mistakes.
Source: Irs.gov, February 2019
Abstract: The new year brings significant changes to hardship distributions under 401k plans and 403b plans. The hardship distribution changes are effective for distributions made in plan years beginning after December 31, 2018, unless otherwise specified. Final comments on the proposed implementing regulations were due on January 14, 2019, and final regulations should be issued later this year. In the meantime, plan sponsors should look to the proposed regulations for implementing guidance.
Source: Truckerhuss.com, February 2019
Abstract: Typically, retirement plan sponsors intend for the funds contained in a retirement plan to be held until the participant retires. Under some circumstances, a participant may need the money now. Some retirement plans allow participants to receive hardship distributions, though they are not required to do so. This article examines some common questions about hardship distributions.
Source: Hallbenefitslaw.com, January 2019
Abstract: The IRS recently issued proposed regulations to implement changes to the rules for hardship distributions from 401k plans made by the Bipartisan Budget Act of 2018 that will take effect on January 1, 2019. The proposed changes will make hardship distributions more widely available and will ease administration of hardship distributions for plan sponsors.
Source: Hansonbridgett.com, December 2018
Abstract: In this episode of the Proskauer Benefits Brief, Paul Hamburger co-chair of Proskauer's Employee Benefits & Executive Compensation Group, and associate Steven Einhorn discuss the recently proposed IRS regulations addressing the hardship withdrawal rules affecting 401k and 403b plans.
Source: Erisapracticecenter.com, December 2018
Abstract: Starting January 1, 2019, participants will again be able to take a hardship distribution for casualty losses to a primary residence even if not in a disaster area. However, the IRS took it one step further. The new regulations now include a provision permitting hardship distributions to cover certain losses resulting from federally declared disasters. Not only will participants no longer have to await separate guidance from the IRS for future disasters, but the IRS also made this particular change available retroactive to 2018 to cover hurricanes Michael and Florence.
Source: Dwc401k.com, December 2018
Abstract: The Treasury Department issued highly anticipated proposed regulations governing hardship withdrawals from 401k plans. The proposed regulations address recent statutory changes made to the hardship withdrawal rules under Code Section 401k. In addition, the proposed regulations eliminate the requirement under the existing regulatory safe harbor to suspend the participant's elective deferrals or employee contributions for a period of six months following receipt of a hardship withdrawal.
Source: Employeebenefitsupdate.com, December 2018
Abstract: The proposed hardship regulations were issued less than a month ago, but there already appears to be a lot of misunderstanding among plan sponsors and those who work with them. This article reviews some of the biggest misconceptions.
Source: Cammackretirement.com, December 2018
Abstract: Though the regulations are only proposed, 401(k) plan sponsors should promptly consider these changes because decisions should be made on applying certain optional changes, which generally can be effective for plan years beginning after December 31, 2018.
Source: Mwe.com, November 2018
Abstract: Plan sponsors and recordkeepers have been eagerly anticipating IRS guidance on changes to the hardship distribution rules made by the Bipartisan Budget Act of 2018, which are effective for plan years beginning on or after January 1, 2019. These changes impact 401k plans that offer hardship withdrawals, which provide active participants the ability to receive their elective deferrals prior to reaching age 59-1/2. They also impact 403b plans.
Source: Groom.com, November 2018
Abstract: The Internal Revenue Service has issued proposed regulations that would change the rules for hardship distributions from 401k and 403b plans. The proposed regulations are scheduled to be published in the Federal Register on November 14, 2018. The provisions of the unpublished draft are summarized here.
Source: Ktserisacorner.com, November 2018
Abstract: As a general rule, there are two key components for a permissible hardship distribution: (1) the withdrawal must be made due to an immediate and heavy financial need; and (2) the amount of the withdrawal must be limited to the amount necessary to satisfy that financial need. Existing regulations provide detailed rules for how plan participants can prove each requirement is met when requesting a withdrawal. The Proposed Regulations would modify and relax many of these rules to conform to new law changes.
Source: Erisapracticecenter.com, November 2018
Abstract: How strictly does the IRS interpret what costs qualify as being associated with the purchase of a primary residence? Is there any wiggle room that would allow renovation costs to qualify for a hardship withdrawal for purchase of a primary residence?
Source: Dwc401k.com, October 2018
Abstract: While the Bipartisan Budget Act of 2018 modified the safe harbor rules for hardship withdrawals starting in the 2019 plan year, the extent to which these modifications will impact 403b plans is still subject to open to interpretation.
Source: Ntsa-net.org, August 2018
Abstract: This article describes recent legislative changes affecting hardship withdrawals and plan loans and some of the issues plan sponsors and practitioners must confront.
Source: Asc-net.com, July 2018
Abstract: In Information Letter 2018-1, the IRS responded to a U.S. Congressman who asked why his constituent could not take a hardship distribution from his 401k plan to pay off his daughter’s college student loans. The IRS explained that a hardship distribution must, among other things, be necessary to satisfy an immediate and heavy financial need. The IRS confirmed in the Letter that because a safe harbor hardship distribution may be made only for the prospective payment of education expenses, it cannot be made for the repayment of student loans.
Source: Drinkerbiddle.com, July 2018
Abstract: The Bipartisan Budget Act of 2018 includes several changes to the rules governing hardship withdrawals from 401k plans. Because the changes apply to plan years beginning after December 31, 2018, plan sponsors should start considering their options now and make decisions regarding which changes, if any, to implement to allow plenty of time to develop and timely distribute participant communications, update procedures and re-program plan administrative systems (including coordination with the plan recordkeeper's systems) and amend their plan documents.
Source: Employeebenefitsupdate.com, July 2018
Abstract: During a 401k audit, hardship distributions are a common area where failures are discovered. The plan sponsor is often unaware that they were required to gather supporting documentation, and they have approved the distribution without verifying that an immediate need existed.
Source: 5500audit.com, July 2018
Abstract: Recent IRS guidance and legislative changes discussed here show that this is an area where both plan sponsors and participants may still have questions.
Source: Laboremploymentperspectives.com, June 2018
Abstract: The Bipartisan Budget Act of 2018 brings important relief for plan sponsors and recordkeepers for tax-qualified retirement plans. This relief includes (1) relaxed hardship withdrawal rules, (2) expanded rollover for improper federal tax levies, (3) California wildfire relief for plan distributions, and (4) a special Congressional committee to address the major funding concerns for multiemployer plans.
Source: Groom.com, April 2018
Abstract: The Act directs the IRS to modify the 401k regulations, within one year from February 9, 2018, to remove the six-month prohibition on contributions following receipt of a hardship distribution and to make "any other modifications necessary to carry out the purposes of" the Internal Revenue Code applicable to hardship distributions from 401k plans.
Source: Bradley.com, April 2018
Abstract: The recently enacted Bipartisan Budget Act of 2018 included some unanticipated provisions that directly affect retirement plans. One such provision relates to the availability and amount of hardship withdrawals made under 401k plans. This article summarizes the impact of these new rules.
Source: Legacyrsllc.com, March 2018
Abstract: The Bipartisan Budget Act of 2018 was passed into law on Feb. 9, 2018 and introduces some unexpected changes for retirement plans. The most significant of the Act's changes for retirement plans reduces the existing restrictions on hardship distributions from 401k and 403b plans.
Source: Icemiller.com, February 2018
Abstract: The Tax Cuts and Jobs Act indirectly changed one of the safe harbor bases for hardship distributions. For tax years 2018-2025, the new law limits casualty loss deductions to those occurring in a federally declared disaster area. Plans that use hardship distribution safe harbors that reference this deduction should consider how they will address requests for losses that occur outside of a federally declared disaster area.
Source: Conduent.com, February 2018
Abstract: The Bipartisan Budget Act of 2018 contains changes to the ways in which hardship withdrawals from qualified retirement plans are administered. The changes reviewed here are effective for plan years beginning after December 31, 2018.
Source: Consultrms.com, February 2018
Abstract: President Trump has signed the Bipartisan Budget Act of 2018 into law, avoiding another federal government shutdown. That law includes provisions that make hardship withdrawals more attractive: removing barriers, increasing available monies, and removing the suspension of contributions.
Source: Psca.org, February 2018
Abstract: The bill calls for the Secretary of Treasury to amend regulations to delete the six-month prohibition on contributions to a retirement plan following a hardship withdrawal. The allowance of hardship withdrawals is also extended in the bill to contributions to a profit sharing or stock bonus plan, qualified non-elective contributions (QNECs) and qualified matching contributions (QMACs) and earnings on the contributions now allowed.
Source: Planadviser.com, February 2018
Abstract: The recently enacted tax reform legislation, commonly referred to as the Tax Cut and Jobs Act, made a change to the types of personal casualty losses that qualify for a casualty deduction under Section 165 of the Internal Revenue Code. This change affects many 401a, 401k, and 403b plans that permit hardship distributions to be made available to their participants and beneficiaries.
Source: Voya.com, January 2018
Abstract: In the wake of any new tax law, there are always issues that cause problems when they are actually put into practice. One such issue is that hardship withdrawals from a 401k plan to address a personal casualty loss of a principal residence may no longer be allowed unless the loss is attributable to a federally declared disaster area.
Source: Asppa.org, January 2018
Abstract: New substantiation guidelines for safe harbor hardship withdrawals have been issued by the IRS. The guidelines made it clear that hardship withdrawals must be substantiated with the proper form of documentation to be a valid distribution, so employers and third-party administrators must understand the guidelines prior to approving hardship distributions.
Source: Lindquistcpa.com, November 2017
Abstract: In these difficult economic times, more participants are considering the option of taking a hardship withdrawal. A participant can only take a hardship withdrawal if it is permitted by the plan and they have an immediate and heavy financial need. This checklist can be used when faced with the task of reviewing and approving hardship requests.
Source: Consultrms.com, November 2017
Abstract: The IRS released a Memorandum to its agents setting forth the substantiation they should expect to see for 401k plan hardship distributions issued. The IRS agents were instructed to examine source documents if they are obtained by the employer or third-party administrator, OR to examine the summary of documentation that the hardship distribution recipient will maintain.
Source: Belfint.com, August 2017
Abstract: Many employers contract with a third-party administrator or platform vendor to administer the hardship application and approval process. But, even if outsourced, employers are the ones at risk of tax liabilities or plan disqualification if the process is not consistent with the very limited authority for early distributions on account of hardship contained in the Code and related regulations.
Source: Frostbrowntodd.com, August 2017
Abstract: Although many providers have used online, participant self-certification to process hardships, serious questions remain whether this process is adequate and the employer, not the provider, remains responsible for any improper hardships. Recent changes to IRS audit guidelines for its examiners indicate the IRS may be more flexible than in the past if certain notice and documentation requirements are met.
Source: Wnj.com, July 2017
Abstract: The IRS recently issued two pieces of long-awaited guidance to facilitate qualified plan operations. The first was the issuance of proposed regulations that would permit forfeitures to be used to fund safe harbor contributions and other corrective contributions. The second was the issuance of new audit procedures regarding the substantiation of hardship distributions, which permits a method of substantiating hardship distributions without having to review and retain the underlying support documentation to show the immediate and heavy financial need for a safe harbor hardship distribution. The new guidance is summarized in this article.
Source: Groom.com, June 2017
Abstract: The IRS recently issued an internal memorandum providing guidance to its employee plans examination group on the substantiation requirements for hardship distributions from a section 401k plan. If your 401k plan recordkeeper has not talked to your company lately about hardship distributions documentation, it may be time to reach out to the recordkeeper.
Source: Erisapracticecenter.com, May 2017
Abstract: Plan sponsors may also elect to add a "hardship withdrawal" option for employees in their 401k or 403(b) plan. This is an optional provision that must be outlined in the plan document before it is available to the participants of the plan.
Source: Benefit-resources.com, April 2017
Abstract: The IRS has released audit guidelines which provide a roadmap for employers to demonstrate that they are properly handling hardship distributions.
Source: Relius.net, April 2017
Abstract: Employees no longer routinely have to provide their employers with documentation proving they need a hardship withdrawal from their 401k accounts, according to the Internal Revenue Service (IRS). Employees do, however, need to keep source documents, such as bills that resulted in the need for hardship withdrawals, in case employers are audited by the IRS, the agency said.
Source: Shrm.org, April 2017
Abstract: This is a list of specific documents that the employer must collect based on each type of hardship. The employee must keep these documents available for the employer at all times.
Source: Castlerockinvesting.com, March 2017
Abstract: After an extended period of uncertainty about what constitutes acceptable substantiation of a hardship withdrawal request, new guidelines for IRS examiners provide clarity. While traditional means of gathering source documents continue to be acceptable, the new guidelines set forth requirements that allow plans to use a summary of those documents instead.
Source: Conduent.com, March 2017
Abstract: Should your 401k plan ever come under audit by the IRS, your documentation will be critical to a swift resolution of the examination. This article covers hardship distribution best practices which can also serve as a helpful checklist.
Source: Bsllp.com, March 2017
Abstract: 401k Hardship Distribution regulations provide that certain safe harbor distributions will be deemed to meet the "immediate and heavy financial need" requirement (for example, deductible medical expenses); however, plans are required to substantiate that the distribution meets the requirements for the specific type of safe harbor distribution.
Source: Bradley.com, March 2017
Abstract: Many plan sponsors and third-party administrators limit hardship distributions to the safe harbor reasons so as to avoid a "facts and circumstances" review of a hardship request, but the safe harbor rules to avoid such review include more than simply restricting hardship distributions to the safe harbor reasons. Errors involving hardship distributions are among the top ten compliance issues found by the Employee Plans Team Audit Program of the IRS.
Source: Aon.com, March 2017
Abstract: This memorandum sets forth substantiation guidelines for EP Examinations employees examining whether a 401k plan hardship distribution is "deemed to be on account of an immediate and heavy financial need" under safe-harbor standards.
Source: Irs.gov, February 2017
Abstract: The IRS has published new examination guidelines for documenting a hardship distribution. Specifically, the memorandum sets forth substantiation guidelines for EP Examinations employees examining whether a 401k plan hardship distribution is "deemed to be on account of an immediate and heavy financial need" for safe harbor distributions.
Source: Asppa.org, February 2017
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